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If you’re thinking about taking legal action after suffering a personal injury, you may be wondering if personal injury settlements are taxable in California. Understanding whether or not settlements are taxable in California will help you make informed decisions and avoid surprises during tax season. In this blog post, we’ll discuss whether personal injury settlements are taxable in California.

Do I Have to Report Personal Injury Settlement to the IRS?

Are personal injury settlements taxable in California?

In most cases, personal injury settlements are not taxable and do not need to be reported to the IRS. According to the Internal Revenue Service (IRS), settlements for physical injuries or physical sickness are generally exempt from federal taxes. This means that if you receive compensation for medical expenses, pain and suffering, or lost wages due to a physical injury, you typically do not have to pay taxes on that money.

However, there are exceptions. If a portion of your settlement is for punitive damages or interest earned on the settlement amount, that portion may be taxable and must be reported to the IRS.

What Type of Settlement Is Not Taxable?

The types of settlements that are generally not taxable include:

  • Compensation for Physical Injuries: Money received for medical expenses, pain and suffering and lost wages related to physical injuries.
  • Compensation for Physical Sickness: Settlements for medical expenses and lost wages due to physical sickness.
  • Emotional Distress: If emotional distress or mental anguish arises directly from a physical injury, the settlement for this distress is not taxable.

On the other hand, there are certain types of settlements that are taxable:

  • Punitive Damages: These are intended to punish the defendant and are considered taxable income.
  • Interest: Any interest earned on the settlement amount is taxable.

It’s important to consult with a tax professional to understand the tax implications of your specific settlement.

How Are Personal Injury Settlements Paid Out in California?

In California, personal injury settlements can be paid out in different ways:

  • Lump-Sum Payment: The entire settlement amount is paid at once. This method provides immediate access to funds. 
  • Structured Settlements: The settlement amount is paid out over time in regular installments.

When deciding how to receive your settlement, consider your immediate financial needs and long-term financial goals. Structured settlements can offer financial stability over time, while lump-sum payments can provide quick access to a large sum of money.

Contact Us for Legal Assistance

At Sargon Law Group, we understand the challenges you may face after an accident and are here to help. If you have questions about your settlement or need legal assistance, contact us today. Our Phoenix personal injury attorney is committed to helping you receive the compensation and care you deserve.